How Scott Griffith, ’90, CEO of Zipcar, drove car sharing to the mainstream Opening New Routes The University of Chicago Booth School of Business Summer 2012 Critical Dialogues Dean Sunil Kumar gets the inside track on Zipcar from CEO Scott Griffith, ’90 20 Temptation’s Siren Song Research by Wilhelm Hofmann investigates desire, willpower, and self-control 10 Good Energy Experts discuss fueling the future at the 60th Annual Management Conference 26
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The University of ChicagoBooth School of Business
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Chicago, Illinois 60637
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P A I DPermit No. 4444
Twin Cities, MN
How Scott Griffith, ’90, CEO of Zipcar, drove car sharing to the mainstream
Opening New Routes
CH
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The University of Chicago Booth School of Business Summer 2012
Critical DialoguesDean Sunil Kumar gets the inside track on Zipcar from CEO Scott Griffith, ’90 20
Temptation’s Siren SongResearch by Wilhelm Hofmann investigates desire, willpower, and self-control 10
Good Energy Experts discuss fueling the future at the 60th Annual Management Conference 26
Accessorize with Booth: It all started when David Booth, ’71, suggested that the school
should have a signature tie. The student-led Dean’s Marketing Advisory Committee
offered to help run a design contest, which concluded in May, with a $300 check and
bragging rights for the best overall design going to fi rst-year Full-Time student Joseph Ryu.
Meenakshi Dash, ’08, won $100 for the most original design and Mark Zmijewski,
Leon Carroll Marshall Professor of Accounting, won $100 for scoring the most “likes”
on Facebook. The fi ve-judge panel evaluated the designs for originality, suitability for a
business setting, and ease of manufacturing. To view all 60 design submissions, visit the
Booth Community Facebook page at Facebook.com/ChicagoBoothBusiness.
From left to right: David Booth, Meenakshi
Dash, Joseph Ryu, and dean Sunil Kumar.
Not pictured: Mark Zmijewski.
Chicago Booth Magazine…
Get it now Download the new Chicago Booth app at ChicagoBooth.edu/Boothapp.
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1Summer 2012 Chicago Booth Magazine
F E A T U R E S
Faculty Digest 9
Balancing Desire and Self-Control in Everyday Life A new paper by Wilhelm Hofmann investigates the temptations we struggle with
the most—from indulging in food and sleep to compulsively checking email—and why we respond
to them in the ways that we do.
By Erin O’Neill
Capital Ideas: Consumption Strikes Back 16Research by John Heaton on the correlation between stock returns and expected future
consumption offers a measure of long-run risk that proves fundamentals can drive risk
premiums in the stock market.
By Vanessa Sumo
Cover Critical Dialogues 20Zipcar CEO Scott Griffi th, ’90, tells dean Sunil Kumar about his journey steering an idealistic
Boston-area start-up into an infl uential public company.
Edited by Judith Crown
Management Conference 2012 26Chicago Booth faculty and industry experts considered the future of alternative fuels and the
challenge of reducing greenhouse gas emissions. Breakout sessions discussed corporate tax policy
and how data is best used to understand consumer shopping habits.
“There is a level of engagement, hard work, and enthusiasm among the students that is absolutely infectious.”
—Anne Thomas,
W. Allen Wallis Distinguished Fellow
Chicago Booth attracts the best and brightest students.
The Annual Fund opens doors for many of them,
including students such as Anne Thomas. With your
continued support, there is no limit to what Chicago
Booth can achieve.
ChicagoBooth.edu/possibilities
5Summer 2012 Chicago Booth Magazine
Booth Receives $3.5 Million in Gifts
New Deputy Deans Appointed
Booth TV Studio Debuts
H E A R D A T C H I C A G O B O O T H
Consulting is a wonderful thing to do, but if you want to be the hero, it might not be the right thing for you.
Beth Rooney
Punit Renjen, chairman of the board, Deloitte LLP
Renjen sat down for a “fi reside chat” with dean Sunil Kumar
and 100 Booth students on a visit to Gleacher Center in
January. Renjen discussed how Deloitte has managed to grow
its consulting business by double digits in four of the past fi ve
years, despite a challenging economy. For complete coverage
of the event, go to ChicagoBooth.edu/ontheweb and enter the
keyword “Renjen.”
5
Chicago Booth Magazine Summer 20126
News Update
New Chief Information Officer Leads Information TechnologyKevin Boyd has joined Booth as senior director, information tech-
nology, and chief information offi cer. He has overall technical
responsibility for the school’s campuses in Chicago, London, and
Singapore, and manages a staff of 45 in operations, application
development, and project and service management. He replaced
Ligia Moreno, who retired after more than eight years at Booth.
For the past two years, Boyd was director of the project manage-
ment offi ce at the General Board of Pensions (Wespath) in Glenview, Illinois. Earlier in
his career, he held technical leadership positions at Tribune Company, CNA Financial
Corp., United Airlines, Bank One Corp, and W.W.Grainger, Inc.
Boyd taught e-commerce at Northwestern University as an adjunct faculty
member from 2003 to 2012. He has a master’s degree in communications
systems, strategy, and management from Northwestern and a bachelor’s degree
from Marquette University.—Chicago Booth Staff
H E A R D AT C H I C A G O B O O T H
As one of the world’s leading business schools in finance, Booth has the faculty capabilities, cutting-edge application, and research to thoroughly cover the CIMA curriculum and bring it to life.John Heaton, Joseph L. Gidwitz
Professor of Finance, on Booth’s
accreditation as a registered
education provider for Certifi ed
Investment Management Analyst
(CIMA) certifi cation. Heaton will
serve as faculty director for the new
program. Booth joins Wharton in
offering the educational component
for CIMA certifi cation, which is
designed for advanced investment
advisors and consultants.
Two Deans to Fill Leftwich’s ShoesDean Sunil Kumar named
two deputy deans for faculty
to replace Richard Leftwich,
who has held the post for the
past eight years and plans to
step down on July 31. The
second deputy dean is being
added as a result of the growth in faculty, Kumar said, and in order to accommodate
the expected future increase in demand.
Steven Davis, William H. Abbott Professor of International Business and Econom-
ics, began sharing responsibilities with Leftwich on April 1. John Heaton, Joseph L.
Gidwitz Professor of Finance, will succeed Leftwich on August 1.
Leftwich, Fuji Bank and Heller Professor of Accounting and Finance, joined Booth
in 1979 and will continue to serve as a member of the faculty. Under his leadership as
deputy dean, the number of tenure-track faculty grew from 113 to 130, with 12 new
hires for the 2012–13 school year. Overall, the number of teaching faculty grew from
169 to 197 during his tenure.
Davis, who joined the Booth faculty in 1985, is an applied economist with
research publications on employment and wage behavior, worker mobility, job loss,
and other topics. He is the former editor of the American Economic Journal: Macro-
economics, a research associate with the National Bureau of Economic Research, an
economic advisor to the US Congressional Budget Offi ce, and a visiting scholar at
the Federal Reserve Bank of Chicago.
Heaton studies asset pricing, portfolio allocation, and time-series economics. His
research in these areas has earned him numerous fellowships, including an Alfred P.
Sloan Research Fellowship, and a National Science Foundation Fellowship. Before join-
ing Booth in 2000, he was the Nathan S. and Mary P. Sharp Distinguished Professor of
Finance at the Northwestern University Kellogg School of Management. He is a former
editor of the Review of Financial Studies.—Chicago Booth Staff
A P P O I N T M E N T S
Bet
h R
oone
y
Steven Davis
Bet
h R
oone
y
Richard Leftwich
Dan
Dry
John Heaton
Cou
rtes
y of
Kev
in B
oyd
Kevin Boyd
7Summer 2012 Chicago Booth Magazine
P H I L A N T H R O P Y
Gifts Support Entrepreneurship,Energy Research Two contributions to Chicago Booth will enable the school to develop new initiatives
in the fi elds of entrepreneurship and energy. A $2 million gift from Edward L. Kaplan,
’71, will endow the New Venture Challenge (NVC), of which he has been the title
sponsor since its fi rst competition in 1996. A $1.5 million gift to the Energy Policy
Institute at Chicago from the Fuel Freedom Foundation will be used to explore eco-
nomic and policy questions surrounding transportation fuels.
The NVC endowment, once fully funded, will enable the competition to be self-
sustaining for years to come. Hosted by the Polsky Center for Entrepreneurship, the
NVC has helped launch scores of companies, including GrubHub, Inc., Braintree, and
BenchPrep, all based in Chicago. Kaplan is cofounder of Lincolnshire, Illinois–based
Zebra Technologies Corp., a pioneering company in barcode technology that went
public in 1991.
“Ed was an important catalyst for the New Venture Challenge and, more broadly,
for the Polsky Center,” said Steven Kaplan, Neubauer Family Distinguished Service
Professor of Entrepreneurship and Finance and faculty director of the Polsky Center.
“In the mid-1990s, he was one of a few alums who advocated that Booth should
develop a strong entrepreneurship program.”
The NVC’s infl uence has extended to the University of Chicago campus and
beyond. The more-than 75 alumni companies whose founders participated in the
competition have raised more than $242 million in equity capital collectively and have
created more than 1,000 jobs. This year, the NVC received a record 119 applications,
up from 89 entries in 2011.
“It is one of the country’s most successful venues for creating new business
ventures,” said Ellen Rudnick, clinical professor of entrepreneurship and executive
director of the Polsky Center.
“The endowment now being created by the Kaplan Foundation will insure the
long-term viability of the NVC and enable it to expand beyond its current limits,”
Rudnick said. “We are thrilled that Ed’s name will be forever linked to this capstone
program at Booth.”
Another fl ourishing discipline at Booth gained recognition with a gift from
the California-based Fuel Freedom Foundation to the Energy Policy Institute at
Chicago (EPIC).
Founded in 2011, EPIC is an interdisciplinary joint enterprise of Chicago Booth
and the Harris School of Public Policy that focuses on economic and social policy
questions related to energy. The gift will help launch the Initiative on the Future of
Transportation Fuels.
“This generous gift will help EPIC conduct the data-driven research that policy
makers and business leaders need to make sound, evidence-based energy policy
decisions,” said Robert Topel, codirector of the center and Isidore Brown and Gladys
J. Brown Distinguished Service Professor in Urban and Labor Economics.—Kate Fratar
To learn more about companies involved with the New Venture Challenge,
visit ChicagoBooth.edu/nvc.
News Update
B Y T H E N U M B E R S
Booth Faculty on the AirIn early March, Booth opened
the Harper Center TV studio.
Professors were soon inter-
viewed on topics ranging from
sports to the European debt
crisis and US monetary policy.
Number of faculty
appearances as
of late May
Number of networks:
Number of professors
interviewed:
John Cochrane
Austan Goolsbee
Randall Kroszner
Tobias Moskowitz
Raghuram Rajan
Luigi Zingales
Chicago Booth Magazine Summer 20128
FOR OVER 50 YEARS,
Find out more at www.crsp.ChicagoBooth.edu.
WE’RE NOT DONE YET.
CRSP HAS EMPOWERED
THE WORLD OF FINANCE.
9Summer 2012 Chicago Booth Magazine 9
IQ and Investing Prowess
Two Sides to Innovation
Why Brand Preferences Vary
Dan Dry
I N T H E H E A D L I N E S
It’s very clear that the outside world is rethinking the India story.Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance and Charles M. Harper Faculty Fellow
India’s business boosters have been consistent in promoting
the potential of “brand India,” especially at prestigious venues
such as the World Economic Forum in Davos, Switzerland,
where Rajan, who is economic advisor to India’s prime minister,
spoke on the issue. But India’s country-with-great-potential
story is wearing thin among international business and political
leaders, according to Rajan and others, a view that was cited in
a February column in the Hindu Business Line.
To learn more about Rajan’s research, visit
ChicagoBooth.edu/magazine/facultylinks.
Chicago Booth Magazine Summer 201210
On average, participants enacted 42 percent of the media
desires they had actively attempted to resist.
Hofmann credited this fascinating soft spot to societal
norms and our general feelings about the cost-benefi t analysis
of these activities. “Modern life is a welter of assorted desires,
marked by frequent confl ict and resistance—the latter with
uneven success,” Hofmann explained. “With cigarettes and
alcohol, there are more costs—long-term, as well as mon-
etary—and the opportunity [to consume] may not always be
the right one. Desires for media may be comparatively harder
to resist because of their high levels of availability and also
because it feels like it does not ‘cost much’ to engage in these
activities, even though one wants to resist.”
But, as vices go, aren’t work and media-usage relatively
good ones to have? According to Hofmann, it depends on
your overall goals. The study warns of the potential for
media habits to develop into abuse and noted, “Whether
underregulation of media use causes serious problems for
Westerners is an intriguing issue.” So, while compulsively
checking email or spending time on Facebook offers a quick
fi x for boredom and one’s need for connectedness, doing so
comes with its own pitfalls. “Even though giving in to media
desires is certainly less consequential,” Hofmann said, “the
frequent media use may still ‘steal’ a lot of people’s time and
attention away from other things that matter.”—Erin O’Neill
Faculty Digest
t happens to the best of us. We vow to lose 10 pounds.
We swear that this vacation, we won’t check email. But
then, after a few weeks, or days—or even minutes—we
give in to temptation.
But why?
In his recent paper, “What People Desire, Feel Confl icted
About, and Try to Resist in Everyday Life,” published in
Psychological Science, Wilhelm Hofmann, assistant professor
of behavioral science—along with two colleagues—found
that some desires are harder to resist than others.
“Self-regulation is important for both theoretical and
practical reasons,” the authors wrote. “Yet, the majority of
research on self-regulation occurs in the laboratory.” In order
to better understand the interplay among desire, motiva-
tion, and self-control in everyday life, the researchers used
smartphone experience sampling to closely monitor desire
experiences in a sample of 205 adults over the period of a
week. Using this technique, the researchers collected infor-
mation on more than 7,000 desire episodes in people’s daily
lives, and thus were able to directly compare various human
desires in frequency, strength, confl ict, and controllability
with each other.
Not surprisingly, the single most frequently mentioned
desire was that for food. Desires for nonalcoholic drinks, sleep,
media, leisure, and social contact also made it to the top of the
list. In terms of desire strength, the most potent desires were for
sleep, sex, and social contact, among others. Surprisingly, desires
for substances long considered to be highly addictive—such
as tobacco and alcohol—were among the weakest in average
strength. In terms of confl icting desires, participants reported
having the highest levels of confl ict in regard to leisure activities
and sleep, followed by spending, media use, and tobacco.
Yet, despite the strength and frequency of many of their
urges, participants were generally able to exhibit impressive
rates of self-control in resisting those desires that were expe-
rienced as problematic. But when it came to media desires
(such as watching TV, checking emails, or surfi ng Facebook)
and desires for work—their willpower often faltered.
Professor Wilhelm Hofmann investigates the
temptations we struggle with most, and why
we respond to them in the ways that we do.
Balancing Desire and Self-Control in Everyday Life
Not surprisingly, the single
most frequently mentioned
desire was that for food.
11Summer 2012 Chicago Booth Magazine
The subsequent research showed
that high-IQ investors are less subject
to the disposition effect, the tendency
to sell winning investments but hold
on to assets that have dropped in
value. These investors are also “more
aggressive about tax-loss trading,
and more likely to supply liquidity
when stocks experience a one-month
high,” the research found. The study
also found that investors with higher
IQ scores “exhibit superior market
timing, stock-picking skill, and trade
execution.”
“It’s difficult to justify why someone
wouldn’t have invested in the stock
market, knowing what a good deal it
has been,” Linnainmaa wrote. “It’s not
just that it may be expensive to buy
stocks and mutual funds, but people
may not have enough knowledge about
them.”—Erin O’Neill
When Brand Loyalty Is Divided
Why does a Bud-
weiser-guzzling couch
potato suddenly
switch to Heineken
when he’s at a cocktail
party with friends?
That’s just what
Pradeep Chintagunta, Joseph T. and
Bernice S. Lewis Distinguished Service
Professor of Marketing, and his co-
author set out to answer in their paper,
“Investigating Brand Preferences Across
Social Groups and Consumption
Contexts, ” published in Quantitative
Marketing & Economics.
Drinkers choose different brands
depending on what they’re doing (for
example, either bowling or sitting on a
They stated, “insider selling is associ-
ated with litigation risk only when
contemporaneous disclosures are
unusually optimistic.”—Dan Kedmey
IQ and Investing ProwessAre smarter people
instinctively bet-
ter investors? For
decades, economists
have debated the root
of the “participation
puzzle,” in strug-
gling to understand why such a small
percentage of the population takes
advantage of stock investments—which
generally produce a higher rate of
return than traditional savings.
Juhani Linnainmaa, associate profes-
sor of finance, and two colleagues
tackled this question in two papers:
“IQ, Trading Behavior, and Performance,”
published in the May Journal of Finan-
cial Economics; and “IQ and Stock
Market Participation,” published in the
December 2011 issue of the Journal of
Finance. The studies found evidence of
a direct correlation between an inves-
tor’s IQ and decisions to invest in the
stock market.
In the first paper, the researchers
collected two decades–worth of scores
from a mandatory army intelligence
test administered to Finnish men who
are required to enlist for nine months
to a year. They analyzed this data along
with records regarding equity return,
trade, and limit-order book data. They
found that higher IQ scores increased
the likelihood of later stock ownership
by 21 percent, even after being con-
trolled for environmental factors such
as wealth, income, age, and profession.
How Word Choice Can Land a Company in Legal Hot Water When a company
discloses informa-
tion to shareholders,
it should watch its
language. An overly
optimistic tone can
expose it to lawsuits
from angry share-
holders, according
to a new paper by
Jonathan Rogers,
associate professor
of accounting, Sarah
Zechman, assistant
professor of accounting, and a colleague
at Ohio State University.
In their study, “Disclosure Tone
and Shareholder Litigation,” which
was published in the November 2011
issue of the Accounting Review, the
researchers used a dictionary-based
measure of optimism in order to
gauge the tone of company statements.
Sued companies used “measurably
more optimistic” language in their
disclosures as compared to peers who
weren’t sued. “These results indicate
a strong link between disclosure tone
and litigation,” the authors concluded.
Further, said the researchers, the
link between tone and litigation
became even stronger when manag-
ers engaged in insider selling that
contradicted the optimism of their
statements. Therefore, according to
Rogers and Zechman, in order to
mitigate legal risk, managers should
avoid overstating the company’s per-
formance, particularly when selling
off their own shares and assets.
Dan
Dry
Jonathan Rogers
Faculty DigestC
hris
Lak
e
Sarah Zechman
Bet
h R
oone
y
Juhani Linnainmaa
IN THE NEWS AND JOURNALS
Chr
is L
ake
Pradeep Chintagunta
Chicago Booth Magazine Summer 201212
couch) and whom they’re with (alone
or among friends). These shifts in
consumption could provide valuable
information to marketers, but the data
for many of these scenarios tends to
be scarce.
Chintagunta and his coauthor
worked around this scarcity by devel-
oping a more parsimonious model
of context-based consumption. The
model reveals that context plays a
powerful role in brand selection.
Smaller companies could increase
their market share by marketing to
a highly-targeted “context or social
group setting.” (Think the Corona-on-
the-beach ad campaign.) Ultimately,
the study suggests “marketers should”
indeed consider how consumers’ prefer-
ences can vary across social group and
consumption context scenarios when
designing their marketing programs.”
—Erin O’Neill and Dan Kedmey
The Consequences of Innovation
There are two sides
to innovation. The
bright side is that
innovative firms are
able to produce more,
which in turn raises
their output, con-
sumption, and wages. The dark side
is that less nimble competitors can be
forced to slash pay and lay off older
workers, who are less able to adapt to
the innovation of the firms. This dark
side, which is called “displacement
risk,” is the subject of a new study by
Stavros Panageas, assistant professor
of finance, and two colleagues.
In their paper, “Displacement Risk
and Asset Returns,” which is scheduled
to be published in the Journal of Finan-
Finding Combinations That Satisfy
In his paper, “The
Combinatorial
Assignment Prob-
lem: Approximate
Competitive Equi-
librium from Equal
Incomes,” published
in the Journal of Political Economy,
Eric Budish, assistant professor of
economics, tackled the problem of
how to design a market-like resource
allocation system in settings where
there are legal or moral restrictions
against using real money to figure
out who gets what. He devised a
new “Competitive Equilibrium from
Equal Incomes” (CEEI) mechanism
that could be applied, for instance, to
course allocation at educational insti-
tutions: which students get to take
the most popular professors’ courses
at Booth? It also could be applied to
shift allocation at companies: which
employees have to work Thanksgiving
or Christmas this year?
cial Economics, and which won the
Best-Paper Award at the Utah Winter
Finance Conference 2011, the authors
measure the magnitude of displacement
risk by looking at consumption data
across generations. The authors find
that, because “innovation benefits the
young at the expense of the old,” growth
firms—which derive a large part of
their value from future inventions—are
a good hedge against displacement risk,
as opposed to less-innovative “value
firms.” Finally, the authors “identify
innovation shocks through their effect
on the consumption of individual
cohorts and show that inter-generation-
al differences in consumption correlate
with the return differences between
value and growth stocks.”—Dan Kedmey
Faculty DigestD
an D
ry
Stavros Panageas
Dan
Dry
Eric BudishThe dark side is
that less nimble
competitors can be
forced to slash pay
and lay off older
workers, who are
less able to adapt
to the innovation of
the fi rms.
Previously proposed
systems for these
kinds of problems,
from both theory and
practice, have
fairness problems,
incentives problems,
or often both.
13Summer 2012 Chicago Booth Magazine
T The CEEI system works as follows.
First, the participants log their prefer-
ences to a computer program. For
example, taking a particular profes-
sor’s class is worth 100 “utils.” Second,
the program assigns each participant
an equal amount of an artificial cur-
rency—say, 10,000 points, plus a
small random amount extra. Third, a
computer finds a “competitive equi-
librium”—prices such that, when each
participant “purchases” the set of goods
she likes best at these prices, subject to
not spending more than her budget of
artificial currency, the market clears, so
that supply equals demand. The reason
for the random amount of extra budget
in step two is to ensure that competitive
equilibrium prices always exist in step
three. Budish teamed up with computer
scientists at Carnegie Mellon University
to develop a computational procedure
capable of finding these prices.
Budish showed that CEEI is attrac-
tive on three dimensions: efficiency,
fairness, and incentives. Here, effi-
ciency means that welfare-improving
trades aren’t left on the table. Fairness
means that the participants don’t envy
each others’ allocations, or, if they do,
their envy is small: I may envy you
if you get one of the top professors
and I don’t, but you won’t get two of
the top professors while I get neither.
Incentives mean that it is in each
participant’s interest to report prefer-
ences truthfully to the computer in
step one—that is, it is impossible to
“game the system.” Budish argued that
all other previously proposed systems
for these kinds of problems, from
both theory and practice, have fair-
ness problems, incentives problems,
or often both.—Kalliope Dimitrakopoulos
Faculty Digest
Rajan and Weber Appointed to G30
Raghuram Rajan,
Eric J. Gleacher Dis-
tinguished Service
Professor of Finance
and Charles M.
Harper Faculty Fel-
low, and Axel Weber,
visiting professor
of economics, have
been appointed to
the Group of Thirty
(G30), an interna-
tional body that
examines the impact
of financial and economic decisions
in the public and private sectors.
The group also includes Mario
Draghi, president of the European
Central Bank, Mervyn King, governor
of the Bank of England, and other
senior participants from public and
private sectors and academia.
“The effectiveness of the G30
depends fundamentally upon the qual-
ity and stature of the group’s mem-
bers, and our new colleagues bring a
wealth of experience and professional
accomplishment to the group,” said
Dan
Dry
Raghuram Rajan
Cou
rtes
y of
Axe
l W
eber
Axel Weber
“The appointment of
Raghuram Rajan
and Axel Weber to
the G30 is further
recognition of their
stature as leaders in
the fi eld.”
—Sunil Kumar
Jacob Frenkel, chairman of the G30
Board of Trustees. Frenkel is also chair-
man of JPMorgan Chase International.
“The appointment of Raghuram
Rajan and Axel Weber to the G30 is fur-
ther recognition of their stature as lead-
ers in the field,” said dean Sunil Kumar.
“It also shows that Booth’s faculty influ-
ence is growing even stronger in the
public debate over key issues affecting
the world economy.”—Allan Friedman
Cochrane Named Guggenheim Fellow
John Cochrane, AQR
Capital Management
Distinguished Service
Professor of Finance,
has been named a
2012 Guggenheim
Fellow by the John
Simon Guggenheim Memorial Foun-
dation of New York.
He is among 181 scholars, artists,
writers, and scientists who received
the honor this year. The winners were
selected from nearly 3,000 applicants
on the basis of prior achievement and
exceptional promise.
Cochrane’s monetary economics
publications include articles on the
relationship between deficits and
inflation, the effects of monetary
policy, and the fiscal theory of the
price level. The Guggenheim Fellow-
ship was awarded for his further work
on the fiscal theory.
Cochrane has served as an editor of
the Journal of Political Economy and asso-
ciate editor of several journals, including
the Journal of Monetary Economics, the
Journal of Business, and the Journal of
Economic Dynamics and Control. His
recent awards include the TIAA-CREF
Institute Paul A. Samuelson Award for
his book, Asset Pricing, the Chookazian
Dan
Dry
John Cochrane
A W A R D S A N D H O N O R S
Jacob Frenkel, chairman of the G30
(continued on page 15)
Chicago Booth Magazine Summer 201214
BOOTHGEAR
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In the photo, Lauren Polo Patnaude, ’11.
15Summer 2012 Chicago Booth Magazine
American Academy of Arts and Sciences,
one of the nation’s most prestigious
honorary societies and a leading center
for independent policy research.
They are among more than 200 lead-
ers in business, science, the humanities,
the arts, and other fields to be recog-
nized this year. “Election to the acad-
emy is both an honor for extraordinary
accomplishment and a call to serve,”
academy president Leslie Berlowitz
said. “We look forward to drawing on
the knowledge and expertise of these
distinguished men and women to
advance solutions to the pressing policy
challenges of the day.”—Allan Friedman
Gary Becker, University Professor of
Economics and Sociology
Douglas Diamond, Merton H. Miller
Distinguished Service Professor of Finance and
Richard N. Rosett Faculty Fellow
Eugene Fama, Robert R. McCormick
Distinguished Service Professor of Finance
Robert Fogel, Charles R. Walgreen
Distinguished Service Professor of
American Institutions
Reid Hastie, Robert S. Hamada Professor of
Behavioral Science
Kevin Murphy, George J. Stigler Distinguished
Service Professor of Economics
Raghuram Rajan, Eric J. Gleacher
Distinguished Service Professor of Finance and
Charles M. Harper Faculty Fellow
Richard Thaler, Ralph and Dorothy Keller
Distinguished Service Professor of Behavioral
Science and Economics
Robert Vishny, Myron S. Scholes Distinguished
Service Professor of Finance
Bertrand and Zingales elected to American Academy of Arts and Sciences
Marianne Bertrand, Chris P. Dialynas
Professor of Economics and Richard
N. Rosett Faculty Fellow, and Luigi
Zingales, Robert C. McCormack
Professor of Entrepreneurship and
Finance and David G. Booth Faculty
Fellow, have been elected fellows of the
Endowed Risk Management Prize, and
the Faculty Excellence Award for MBA
teaching.—Allan Friedman
Hofmann Wins Early Career Award
Wilhelm Hofmann,
assistant professor of
behavioral science,
received this year’s
2012 Social Cogni-
tion Early Career
Award, which rec-
ognizes contributions to the study of
social cognition by junior scientists. It
was presented to him by the Interna-
tional Social Cognition Network.
Hofmann has received several other
awards in his burgeoning career, includ-
ing the 2009 William Stern Award of
the German Psychological Society, and
the 2010 Distinguished Young Scientist
Award (Heinz-Maier-Leibnitz Award)
of the German Science Foundation.
His work has appeared in numerous
psychological journals, including Psy-
chological Science and the Journal of
Personality and Social Psychology. His
work has also been featured in Scientific
American Mind, Discovery News, the
New York Times, Financial Times, the
Guardian, the Telegraph, and Forbes, as
well as many broadcast outlets includ-
ing ABC, NBC, CBC, and Fox News.
Hofmann also serves on the editorial
boards of Social Psychological and Per-
sonality Science and the European Jour-
nal of Personality.—Kate Ancell
Faculty DigestD
an D
ry
Wilhelm Hofmann
Bet
h R
oone
yMarianne Bertrand
Chr
is L
ake
Luigi Zingales
Among Their PeersBertrand and Zingales join nine other Booth faculty who earlier were elected fellows of
the Academy of Arts and Sciences
(continued from page 15)
Chicago Booth Magazine Summer 201216
JOHN HEATON Joseph L. Gidwitz Professor of Finance
Award Winner
Hoover Institution National Fellow (1993–94)
Sloan Foundation Fellowship (1993–95)
National Science Fellowships (1993–98)
Specializes in
asset pricing, portfolio allocation, and time-
series economics
Teaches
investments, fi nancial instruments, and
topics in empirical fi nance
Previous Education
PhD in economics, University of Chicago
MA in economics, University of
Western Ontario
BA in commerce, University of Windsor
Feature Capital Ideas
17Summer 2012 Chicago Booth Magazine
This article was originally published in the May 2012 issue of Capital Ideas,
a publication highlighting faculty research at Chicago Booth. This issue
featured selected papers on investment management. For more information, visit
ChicagoBooth.edu/CapIdeas.
Mat
thew
Gils
on
By Vanessa Sumo
Fundamental economic variables regain importance in explaining risk premiums in stock markets
Consumption
Strikes Back
When investors think about the risk of investing
in the stock market, one of the things they pay
attention to is how stocks and the underlying
earnings of companies are affected by movements in the
economy. Stocks that closely follow the ups and downs
of business cycles are considered riskier, because these
stocks will typically fall at the fi rst hint of a downturn
and rise faster as the economy recovers. From the
investors’ perspective, then, stocks of companies whose
earnings are most affected by economic conditions
should promise a bigger return.
The high returns observed in the stock market would
therefore suggest that its performance is strongly related
to business cycles. Indeed, many people think that an
economic recession goes hand in hand with a bear market.
However, John Heaton, Joseph L. Gidwitz Professor of
Finance, says this often has not been true in the past.
“There have been a lot of settings where stocks have come
down but the economy has not moved,” says Heaton. Why,
then, would investors demand high risk premiums in the
stock market?
Perhaps equally baffl ing is why value stocks, which are
stocks with low market values relative to the fundamental
factors that determine their price, have had consistently
higher returns than growth stocks, which are stocks
whose earnings are expected to grow rapidly. This
difference in average returns arises even though the
returns on both types of portfolios are about equally
correlated with business cycles. It is unclear from simply
looking at the correlation between the returns of different
portfolios and the state of the economy why investors
would ask for a higher return for holding value stocks.
Chicago Booth Magazine Summer 201218
Feature Capital Ideas
These puzzling observations have overlooked the fact that
investors are concerned not only about the impact of short-
term fl uctuations in business cycles on stock prices, but also
about how an uncertain economic future might affect their
investments, according to a recent paper by Heaton, Lars Peter
Hansen, a professor in the Department of Economics at the
University of Chicago, and Nan Li, a professor at National
University of Singapore, titled “Consumption Strikes Back?
Measuring Long-Run Risk.” In particular, a decline in the
stock market today may refl ect an underlying shock to the
economy that will not dissipate quickly and will have an
impact over a long horizon.
“Maybe what’s really happening is that when the stock market
goes down today, investors think that this is telling them a lot
about the state of the economy in the future,” Heaton says. If
investors perceive that economic conditions will be worse in
the future, then investors will likely ask for a higher return on
stocks today to compensate them for that higher risk.
Measuring Long-Run Risk
Hansen, Heaton, and Li develop a theory that captures long-
run risk, or the risk that arises from the uncertainty about
the long-run growth of the economy. They show also how
to appropriately measure the relationship between current
stock market returns and future economic conditions—a
relationship that leads to differences in required returns.
Under this theory, stocks that have higher predicted required
returns should have lower prices to refl ect the additional
return needed to persuade investors to buy those stocks.
An economic downturn can raise uncertainty about the
pace of future economic growth in several ways. For instance,
a number of people who lose their jobs in a recession will not
fi nd work again and will leave the labor force, permanently
reducing the economy’s productive capacity. Other bad
shocks that investors may see as threats to future economic
growth include a widening government defi cit that raises the
prospect of higher taxes in the future or a recession that makes
politicians feel more protectionist in terms of international
trade. As a result, a recession today can make investors think
hard about the risk that the economy may no longer return to
its long-run growth path.
Hansen, Heaton, and Li use their theory to understand
whether an exposure to long-run risk can help explain the
difference in returns of value and growth portfolios. In
particular, if the cash fl ows generated by value stocks are more
highly correlated with future economic conditions compared
with those of growth stocks, then investors would demand a
higher return to hold a value portfolio that they perceive to
have a higher exposure to long-run risk.
Indeed, the study fi nds that the cash fl ows of value portfolios
are strongly correlated in the long run with macroeconomic
shocks, while growth portfolios show little correlation. The
results confi rm the authors’ argument that investors are
concerned not just about the short-term impact of business
fl uctuations, but also about how these disturbances will affect
economic prospects years from now. Investors see the long
run as an important source of risk, which they consider when
accepting a price for the assets they buy.
“When the stock market goes down today, investors think that this is telling them a lot about the state of the economy in the future.” —John Heaton
19Summer 2012 Chicago Booth Magazine
Consumption Makes a Comeback
Before Hansen, Heaton, and Li’s study, researchers had
somewhat abandoned the idea that stock prices largely refl ect
the relationship between the aggregate economy and the stock
market. The economic models that researchers typically use did
not adequately explain the consistently high equity premiums
observed in the data, leading academics toward behavioral
biases and transactions costs to account for this shortcoming.
But by fi guring out how to accurately measure long-run
risk, Hansen, Heaton, and Li have made it possible for
fundamental economic variables to once again play a key role
in determining asset prices. That’s the story behind the paper’s
title. “What we’re saying is that using fundamentals like
consumption to measure risk can actually work if you look at a
longer horizon,” says Heaton.
Consumption is the largest component of gross domestic
product and is an important indicator of economic well-
being. By looking at the correlation between stock returns and
expected future consumption, Hansen, Heaton, and Li were
able to come up with a measure of long-run risk that—when
linked to the economic shocks that investors see today—
proves that fundamentals can indeed drive risk premiums in
the stock market. ■
“Consumption Strikes Back? Measuring Long-Run Risk.” Lars Peter
Hansen, John Heaton, and Nan Li. Journal of Political Economy,
April 2008.
To watch a video of John Heaton explaining his research, visit ChicagoBooth.edu/CapIdeas.
“Using fundamentals like consumption to measure risk can actually work if you look at a longer horizon.” —John Heaton
Chicago Booth Magazine Summer 201220 Chicago B
Feature Critical DDiiaalogguuesis a series of conversations with members
of the Chicago Booth community who
play key roles in shaping business and
economic policy worldwide.
In early 2003, following the internet boom, Scott Griffi th, ’90, had the experience of running two start-ups
under his belt and was looking for his next endeavor. He was intrigued by Cambridge, Massachusetts–based
Zipcar, the young company that pioneered the big idea of car sharing. The concept was simple. In large
cities, where car ownership was costly, Zipcar members could rent a Honda Civic or a Volkswagen Beetle to
run errands or head for a weekend getaway, all for much less than the cost of a conventional car rental. And
the venture was irresistibly green. Reducing the number of vehicles downtown would lower pollution, parking
demand, and gridlock.
But the company was ineffi cient and losing money, so when Griffi th stepped in as chief executive, he applied
the kind of rigorous data-driven analysis he fi rst learned at Booth. He nurtured a performance-based culture,
launched hyper-local marketing campaigns, expanded the vehicle fl eet, and targeted new markets, growing
the company to 18 metropolitan areas and 250 college campuses. He also broadened the appeal of the brand
from utilitarian to fun.
Membership at Zipcar has grown to more than 700,000, and the company boasts a fl eet of more than
9,000 vehicles, not just Civics, but Mini Coopers, BMWs, Fords, and even hybrid and all-electric vehicles.
The company went public in April 2011 and its stock is traded on the NASDAQ under the symbol ZIP.
Griffi th recently discussed his Zipcar journey with dean Sunil Kumar in a Critical Dialogues conversation.
20 Chicago Booth Magazine Summer 2012
Edited by Judith Crown | Photos by Matthew Gilson
21Summer 2012 Chicago Booth Magazine 21Summer 2012 Chicago Booth Magazinegazine
Kumar: When you were fi rst recruited to join the team at Zipcar,
what attracted you to the company’s idea and business? What
were some of the things you considered in making the decision?
Griffi th: I like to think of Zipcar as my own personal sweet
spot because it brought together three of my passions:
innovation, transportation, and cities. I grew up in Pittsburgh
and saw the incredible impact that innovation and technology
had in turning that city around after the death of the steel
industry. I had moved back to Boston after running two
internet start-ups. I was a cancer survivor, and I wanted to do
something that made a difference. In 2002, I started watching
Zipcar and saw a huge idea. When I was offered the CEO role
in early 2003, I knew I was taking a tremendous risk, but I
loved the vision.
Kumar: What kinds of changes did you have to make to move
the company forward?
Griffi th: We’ve been able to build the brand by being very
specifi c and deliberate in our business model and the processes
for everything from fl eet management to hyper-local marketing.
For example, when I arrived, there was a move afoot to do a
major media buy to place ads on trains and in bus shelters.
It didn’t go well because you can’t explain what Zipcar is
about on a bus ad. But out of failure came a better idea—very
localized zone marketing. We created print materials that
we placed in card holders at dry cleaners and cafés. We put
grassroots marketers on the sidewalks with collateral. I even
rode through neighborhoods on a fl atbed semi with Zipcars on
it and used a bullhorn to explain what Zipcar was about.
Also, when I joined the company, we had 60 cars in New York
City, but they were spread out, so effi cient marketing was
diffi cult. We moved all the cars to the Chelsea area, a hip, young
neighborhood in lower midtown, where we were able to target
our message. At the time, we were growing at a 15-percent rate,
but when we focused on Chelsea with our concentrated fl eet and
hyper-local marketing approach, our membership tripled in a
month and a half. That was a goose-bump moment.
Kumar: Did you have to change the brand’s positioning?
Griffi th: At the start the image was too basic, too green. We
offered mostly white or silver Honda Civics and VW Beetles.
To reach a broader audience, we needed to offer more variety
and make the brand about lifestyle. In 2004, we started adding
colorful Mini Coopers, Mazdas, and BMWs, even SUVs. That
generated some good press and expanded the appeal to a much
broader audience of users.
Kumar: Why did you make the decision to go public last year?
Griffi th: Although we went public last year, the strategy was
set years earlier when we decided to be a global company. The
car-sharing business traditionally has been divided into two
camps: smaller local operators with a tight geographic focus,
“When we focused on Chelsea with our concentrated fl eet and hyper-local marketing approach, our membership tripled in a month and a half. That was a goose-bump moment.”—Scott Griffi th